Netflix released earnings after market close yesterday. After some under-par numbers, Netflix shares are on track to lose $40B in value, taking the year-to-date performance down 57%. If the after-hours fall holds up, Netflix will become the worst performing stock this year in both the S&P500 and Nasdaq100.

What are the numbers?

The Q1 revenue figures ended at $7.8B, up 9% from the same quarter last year. Their EPS was $3.60, compared to $3.85 from Q1 2021.

Netflix started their letter to shareholders by admitting that revenue growth is slowing. These numbers would always be taken very negatively in a market that is drastically adjusting its value of growth companies.

The main driver behind this sell off was not the slow in revenue growth, but rather the subscriber numbers. The company has forecasted subscriber numbers to fall by another 2 million in the next quarter, to about 219.6 million, after losing 200,000 in Q1. Estimates were the opposite, assuming Netflix would be able to increase this number by about 2.6 million.

Netflix blamed the dramatic slowdown in part on saturation in its biggest markets. They also acknowledged the impact of rising competition from streaming services launched by other media groups such as Disney, Warner Bros Discovery and Paramount. Together, these factors had created “revenue growth headwinds”, the company said.

Netflix raised prices last quarter, which saw them lose 600,000 subscribers in the US and Canada. They also removed their services in Russia, causing a further loss of 700,000 subscribers.

What can they do now?

Netflix are looking to improve the quality of the service and the media they offer in an attempt to increase revenue and subscribers throughout the rest of the year.

Alongside the 220 million users, Netflix assumes their service is being shared with an additional 100 million households. They will be looking at ways to monetise these households and work on ways to limit account sharing.

Rising household costs

Household costs have been on the rise this year. Heating, electricity and fuel have all risen in price since the supply of Russian resources have been shut off. Also, rising interest rates were already increasing day to day life costs.

So how bad can it get for Netflix shares? Individuals will be looking to cut costs where they can. Owning multiple subscriptions to streaming services is not going to be an option for many. How well can Netflix do to make themselves the best option?

I personally think Netflix will struggle to increase revenue by reducing their account sharing problem. If these households lose out on using friends accounts, I think most will be unlikely to buy their own subscriptions.

Overview

Netflix looks set for a tough year. The share price is now down to levels not seen since September 2019. Their COVID boom is completely wiped out. I think it there could be some time before we see Netflix start delivering strong numbers that impress shareholders.

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